As New Year's Eve quickly approaches, and we all prepare to make our 2013 investing resolutions, it is a good time to reflect on the energy sector in year that was 2012. In this December series, our writers will be recapping some of the most popular, highest-performing stocks in this sector. We will examine whether the gains these companies provided their shareholders in 2012 are sustainable, or whether they merely can be attributed to one-time events or fizzling trends. Consider these pieces as gifts to benefit our Foolish, long-term investors seeking exposure to the energy sector. To kick off this series, we will take a look at Transocean (NYSE: RIG ) , which, as of this writing, is up 17.3%.
Here is how it's done in comparison to its peers:
RIG data by YCharts
Company | YOY Change in Operating Free Cash Flow * | YOY Change in Net Income |
|---|---|---|
Transocean | $563 million | ($1.1 billion) |
Halliburton (NYSE: HAL ) | ($453 million) | $33 million |
Seadrill (NYSE: SDRL ) | ($40 million) | ($302 million) |
Nabors Industries (NYSE: NBR ) | ($14 million) | ($212 million) |
Source: Company 10-Ks. *Nine months ending September 2012
The year that was 2012 for Transocean
To get a sense of what is happening at Transocean, we need to take a look back to just before the year started. Back in November 2011, while the company was still embattled in litigation over the Deepwater Horizon spill, a deepwater rig operated by Transocean had a spill off the Brazilian coast. While Chevron (NYSE: CVX ) has claimed full responsibility for the event, a civil lawsuit has held both Chevron and Transocean up in courts for over a year. The prosecutors seek $20 billion in damages for the 3,000-barrel spill. The civil suits represent the largest environmental prosecutions in the history of Brazil. For much of the year, Transocean has been in the trenches trying to get clear of these lawsuits.
Luckily, Both Chevron and Transocean finally may be able to put some of their Brazilian troubles away soon. This past Friday, both companies agreed to change their offshore safety and operations procedures as part of the civil lawsuit. Also, the federal case against the companies, which could have banned both of them from operating in Brazil, was overturned this past Friday as well. This ruling is rather handy for the Brazilian national oil company Petrobras (NYSE: PBR ) too; Transocean operates eight rigs for Petrobras.
Much like all civil suits, this one will probably take quite some time to resolve. Just this past month, BP (NYSE: BP ) settled its criminal charges in the Deepwater Horizon case with a $4 billion fine and manslaughter convictions for some of the company's supervisors. So don't expect Transocean to be out of the litigation weeds for quite some time.
Is this sustainable?
If you look at the recent company earnings reports, not much really jumps out to show why the company has outperformed its peers as well as it has. Revenue has been on the decline in the past three quarters and Transocean only made a profit in one quarter so far this year. On the other hand, operational cash flow has steadily increased and it has strengthened its overall cash position. So from an operational standpoint, the company hasn't done anything too spectacular.
So let's look at the stock price and put this year's performance in perspective. In January of this year, the company's stock price was at an eight-year low and it had just bottomed out following the Brazilian coastal spill. So, even though performance in 2012 may look great, any investor who owned shares prior to the spill still sees his investment down 22%.
Looking to the future, the drilling services industry will continue to grow thanks to new technology to identify and tap into new fields all over the world. What should be of concern for investors, though, is that Transocean can be hit hard by spills, even if it is not its fault. So while we cannot say that another accident is an inevitability, accidents do happen, and chances are that Transocean's shares will show the scars of those spills.
The oil and gas industry is an inherently risky business dating all the way back to the first wildcatters. While these risks can sink several companies, Motley Fool analyst Jim Mueller sees one company that has been around since the beginning of oil exploration and has the potential to rise above the risk. He has put together a premium report on this company which you can read by clicking here.
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